Examining the big lie: How the facts of the economic crisis stack up
Barry Ritholtz
Washington Post, November 19

~~~

It’s fair to say that our discussion about the big lie touched a nerve.

The big lie of the financial crisis, of course, is that troubling technique used to try to change the narrative history and shift blame from the bad ideas and terrible policies that created it.

Based on the scores of comments, people are clearly interested in understanding the causes of the economic disaster.

I want to move beyond what I call “the squishy narrative” — an imprecise, sloppy way to think about the world — toward a more rigorous form of analysis. Unlike other disciplines, economics looks at actual consequences in terms of real dollars. So let’s follow the money and see what the data reveal about the causes of the collapse.

Rather than attend a college-level seminar on the complex philosophy of causation, we’ll keep it simple. To assess how blameworthy any factor is regarding the cause of a subsequent event, consider whether that element was 1) proximate 2) statistically valid 3) necessary and sufficient.

Consider the causes cited by those who’ve taken up the big lie. Take for example New York Mayor Michael Bloomberg’s statement that it was Congress that forced banks to make ill-advised loans to people who could not afford them and defaulted in large numbers. He and others claim that caused the crisis. Others have suggested these were to blame: the home mortgage interest deduction, the Community Reinvestment Act of 1977, the 1994 Housing and Urban Development memo, Fannie Mae and Freddie Mac, Rep. Barney Frank (D-Mass.) and homeownership targets set by both the Clinton and Bush administrations.

When an economy booms or busts, money gets misspent, assets rise in prices, fortunes are made. Out of all that comes a set of easy-to-discern facts.

Here are key things we know based on data. Together, they present a series of tough hurdles for the big lie proponents.

•The boom and bust was global. Proponents of the Big Lie ignore the worldwide nature of the housing boom and bust.

>

The housing boom and bust was global — Source: McKinsey Quarterly
>

A McKinsey Global Institute report noted “from 2000 through 2007, a remarkable run-up in global home prices occurred.” It is highly unlikely that a simultaneous boom and bust everywhere else in the world was caused by one set of factors (ultra-low rates, securitized AAA-rated subprime, derivatives) but had a different set of causes in the United States. Indeed, this might be the biggest obstacle to pushing the false narrative. How did U.S. regulations against redlining in inner cities also cause a boom in Spain, Ireland and Australia? How can we explain the boom occurring in countries that do not have a tax deduction for mortgage interest or government-sponsored enterprises? And why, after nearly a century of mortgage interest deduction in the United States, did it suddenly cause a crisis?

These questions show why proximity and statistical validity are so important. Let’s get more specific.The Community Reinvestment Act of 1977 is a favorite boogeyman for some, despite the numbers that so easily disprove it as a cause.It is a statistical invalid argument, as the data show.

For example, if the CRA was to blame, the housing boom would have been in CRA regions; it would have made places such as Harlem and South Philly and Compton and inner Washington the primary locales of the run up and collapse. Further, the default rates in these areas should have been worse than other regions.

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CRA were less likely to default than Subprime Mortgages — Source: University of North Carolina at Chapel Hill
>

What occurred was the exact opposite: The suburbs boomed and busted and went into foreclosure in much greater numbers than inner cities. The tiny suburbs and exurbs of South Florida and California and Las Vegas and Arizona were the big boomtowns, not the low-income regions. The redlined areas the CRA address missed much of the boom; places that busted had nothing to do with the CRA.

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Suburbs and Exurbs were where the boom & bust occurred — and not the CRA regions — Source: Washington Post
>

The market share of financial institutions that were subject to the CRA has steadily declined since the legislation was passed in 1977. As noted by Abromowitz & Min, CRA-regulated institutions, primarily banks and thrifts, accounted for only 28 percent of all mortgages originated in 2006.

•Nonbank mortgage underwriting exploded from 2001 to 2007, along with the private label securitization market, which eclipsed Fannie and Freddie during the boom.

Check the mortgage origination data: The vast majority of subprime mortgages — the loans at the heart of the global crisis — were underwritten by unregulated private firms. These were lenders who sold the bulk of their mortgages to Wall Street, not to Fannie or Freddie. Indeed, these firms had no deposits, so they were not under the jurisdiction of the Federal Deposit Insurance Corp or the Office of Thrift Supervision. The relative market share of Fannie Mae and Freddie Mac dropped from a high of 57 percent of all new mortgage originations in 2003, down to 37 percent as the bubble was developing in 2005-06.

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Nonbank mortgage underwriting exploded from 2001 to 2007, along with the private label securitization market, which eclipsed Fannie and Freddie during the boom – Source: University of North Carolina at Chapel Hill
>

•Private lenders not subject to congressional regulations collapsed lending standards. Taking up that extra share were nonbanks selling mortgages elsewhere, not to the GSEs. Conforming mortgages had rules that were less profitable than the newfangled loans. Private securitizers — competitors of Fannie and Freddie — grew from 10 percent of the market in 2002 to nearly 40 percent in 2006. As a percentage of all mortgage-backed securities, private securitization grew from 23 percent in 2003 to 56 percent in 2006

>
Subprime Lenders were (Primarily) Private

Only one of the top 25 subprime lenders in 2006 was directly subject to the housing laws overseen by either Fannie Mae, Freddie Mac or the Community Reinvestment Act — Source: McClatchy
>

These firms had business models that could be called “Lend-in-order-to-sell-to-Wall-Street-securitizers.” They offered all manner of nontraditional mortgages — the 2/28 adjustable rate mortgages, piggy-back loans, negative amortization loans. These defaulted in huge numbers, far more than the regulated mortgage writers did.

Consider a study by McClatchy: It found that more than 84 percent of the subprime mortgages in 2006 were issued by private lending. These private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year. And McClatchy found that out of the top 25 subprime lenders in 2006, only one was subject to the usual mortgage laws and regulations.

A 2008 analysis found that the nonbank underwriters made more than 12 million subprime mortgages with a value of nearly $2 trillion. The lenders who made these were exempt from federal regulations.

>
cra-chartg1109
Lenders made 12 million subprime mortgages with a value of nearly $2 trillion. Mortgage Companies and Thrifts NOT affiliated with CRA made 75% of Subprime Loans from 2004-07, Source: Orange County Register
>

A study by the Federal Reserve shows that more than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions. The study found that the government-sponsored enterprises were concerned with the loss of market share to these private lenders — Fannie and Freddie were chasing profits, not trying to meet low-income lending goals.

>

Fannie and Freddie risky loan purchases was dwarfed by Private Label Securitization Source: University of North Carolina at Chapel Hill
>

Beyond the overwhelming data that private lenders made the bulk of the subprime loans to low-income borrowers, we still have the proximate cause issue. If we cannot blame housing policies from the 1930s or mortgage tax deductibility from even before that, then what else can we blame? Mass consumerism? Incessant advertising? The post-World War II suburban automobile culture? MTV’s “Cribs”? Just how attenuated must a factor be before fair-minded people are willing to eliminate it as a prime cause?

I recognize all of the above as merely background noise, the wallpaper of our culture. To blame the housing collapse that began in 2006, a recession dated to December 2007 and a market collapse in 2008-09 on policies of the early 20th century is to blame everything — and nothing.

~~~

Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture.

Category: Apprenticed Investor, Bailouts, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

90 Responses to “Examining the big lie: How the facts of the economic crisis stack up”

  1. Nuggz says:

    Dear Mr. Ritholtz,

    Please stop generating factual, precise reporting as it simply doesn’t fit squarely with the GOP narrative.

    The dullards will continue to spew their hate for Frank/Dodd. Mainly due to the fact that one is a homosexual.

    Indeed.

  2. albnyc says:

    Please stop interrputpting our national delusion that facts don’t matter with more facts. It’s distracting us from our shopping.

  3. BusSchDean says:

    Well argued. Now if we can just get some business leaders (of any gender) to man up to a philosophy that embraces market regulations that spur competition, bring transparency for buyers (whether they are buying pigs ears for their family pet, pork chops for the table, pork bellies, or stock in ADM), and actually causes those who lose to actually lose (no bailout). Oh, and if you break the law you get held accountable.

    It would help if they would also break the cycle of: raise CEO salary to new historic high => benchmark against other CEO’s historically high salaries => raise CEO salary to new historic high. Yhis thinking is predicated on the belief that: 1) we must have larger firms (actual synergy and increased efficiency or compromised market competition — makes no difference); 2) few people have the experience needed to run large firm; 3) demand > supply for CEO of large firms => raise salaries.

  4. InterestedObserver says:

    The three most important words in that piece are “money gets misspent”. They’re important since the money trail can be quantified and followed.

    The housing situation is as laid out. Then there are the secondary events. For example, the housing asset bubble encouraged further misspending by either unwise housing trade-up or borrowing against the transiently more valuable asset. More misspending. Even if one didn’t follow that path, money was cheap which created the conditions for general misspending. Along the way, the government misspent on wars and other areas that left no legacy of infrastructure behind.

    A whole lotta misspending – cue up Led Zepplin…

    Of course, nobody wants to own up to it, and understandably nobody wants to take the loss. Blaming it on a law or regulations is clean. Nothing personal, but the fact is that a lot of people made plenty of decisions for which this was the inexorable outcome. Kind of like the dot.com boom/crash except that the scope was a lot broader, the tally was a lot higher due to that broadness, and you didn’t have some useful infrastructure at the end that would be of general value. Sure, the homes built have some value, but the key word is some.

    Misspending doesn’t have a political affiliation, nor does it differentiate between government and private sources. If the resources are misspent, they’re misspent pure and simple.

  5. BusSchDean says:

    Well argued. Now if we can just get some business leaders (of any gender) to man up to a philosophy that embraces market regulations that spur competition, bring transparency for buyers (whether buying pigs ears for the family dog, pork chops for the table, pork bellies, or stock in ADM), and results in real loses (no bailouts). Oh, and if you break the law you get held personally accountable.

    It would help if they would also break the cycle of: raise CEO salary => benchmark against other CEO’s historically high salaries => raise CEO salary. This thinking is predicated on the false belief that: 1) we must have larger firms (increased efficiency or compromised market competition — makes no difference); 2) few people have the experience needed to run large firm; 3) demand > supply for CEO of large firms => raise salaries.

  6. Winston Munn says:

    George Bush proved that facts don’t matter.

  7. Jim67545 says:

    Clarification lest someone is mislead: the table “Subprime Lenders were (primarily) private” then shows several as owned by banks but which, at the time of the bubble, were private. Countrywide to BOA is a case in point.

  8. cpd says:

    Your articles about the big lie are excellent. One thing though – I think the biggest factor is the role of the Fed under Greenspan and Bernanke. Cheap money, leverage and the gutting of meaningful financial regulation all emanated from them. As far as I am concerned, the Fed is public enemy number one for the current economic mess.

  9. rktbrkr says:

    None is so blind as he who refuses to see.

    The regulators turned a blind eye to excesses while George Bush crowed about creating an “ownership society” (which was actually an over-debted society). I remember people of normal means telling stories about waiting online overnight (like they were buying concert tickets) to buy FL condos to flip. Amateur hour.

    Bogus appraisals and fraudulent financing whipped up into a souffle of financial pain for those who drank the coolaid.

  10. VennData says:

    Gingrich likes Chile’s solution Social Security, mandated savings…

    http://abcnews.go.com/blogs/politics/2011/11/gingrich-outlines-social-security-reform-criticizes-super-committee/

    …but he doesn’t “Obama’s” mandated health care accounts.

    Hmm… so one philosophical viewpoint in one situation and another in another. Like the CRA / Ownership Society? (as Bil lMahler calls it, the “…No pets, no water bed society.” )

    Gingrich is such an ideas guy:

    And Gingrich says the transition to a private social security system is costless. Oh… So the way the system currently works is current payers, pay… and the current beneficiaries get that money. So if the current payers are paying into their own private accounts – managed by Wall Street firms – then where does the money come from for the current beneficiaries? …insert the Big Idea here Newt.

    Newt sites… a Heritage Foundation report… the same people who report that the CRA caused the housing crisis. I see. Very useful this Heritage Foundation.

    not mandated health car

    Typical GOP

  11. Edoc says:

    Thanks for keeping the truth alive Barry. Sadly the history on this is already written and the lies have taken hold. The vast majority of people believe the FOX News and Rick Santelli view of events. Any information not conforming to this view is spat out like a bitter pill.

  12. Lord says:

    Yes, these aren’t fools but liars, treating their audience as fools. The “believers” are in on the joke while acting crazy signals their intransigence to compromise.

  13. BusSchDean says:

    cpd: Yep, the Fed creating and sustaining cheap money plus the loss of G-S pretty much set the stage. But no business executive, no CEO, no BOT, was compelled to act in the manner that many chose to act.

    Consider how quickly business leaders were willing to not simply exploit an opportunity, as we would want any bright business person to do, but to do so with complete disregard for the implications of their actions. Hiding information to shift risk, ignoring the risk to their own firms — costing tens of thousands of jobs and uncounted millions in lost retirement funds of their own employees (“loyal” employees who invested in company stock), and over-leveraging the firm. These were decision made not in the best interest of their investors or employees. This part has nothing to do with regulators or too much money chasing to few opportunities. This part is about shortsightedness, misaligned compensation, and a stunning lack of managerial accountability.

    The Fed, mostly Greenspan but others contributed, did create a potentially ruinous environment.

  14. “… Unlike other disciplines, economics looks at actual consequences in terms of real dollars…”

    BR,

    are you sure about that?

    most ‘Practitioners’, of what passes for “Economics”, Run, as fast as they can, from the Idea of “Real”-anything..(see: CPI, U-3/U-6, (now) “GDP”–instead of the previously reported GNP .. for starters..)

    “real dollars”? are there, even, any? in Circulation?

    do we use this definition..

    http://www.thefreedictionary.com/Dollar

    or, this one..

    Dollars or Units $1 371 4/16 grain (24.1 g) pure or 416 grain (27.0 g) standard silver
    http://encyclopedia.thefreedictionary.com/Coinage+Act+(1792)

    ??

  15. dad29 says:

    One factor which wasn’t mentioned above is the entry of women into the workforce (c. 1970 ffd.)

    I contend that this is a significant precursor. While family incomes rose in the short-term (20-30 years) as a result of that phenomenon, the longer-term effect was to diminish family cash flow: over time the demand-curve for labor “bent” towards flat but the available labor continued to grow. The recession of 2000/01 hurt, and the current recession is the hammer-blow.

    All the other factors you mention–in particular, the “mis-spent/mis-allocated” factor, are players especially the delusion that a $100K home became a $400K home just by sitting there for 20 years.

  16. BusSchDean says:

    Oops….BOD not BOT

  17. The more I listen to the various narratives, the less convinced I am that I or anyone really understands the causes of this mess. The desire to boil this down to simple explanations almost certainly results in a less than complete understanding. Perhaps the biggest problem is the underlying assumption that blame can be fixed on some single entity.

    If there is anything that can be agreed upon is that every financial system ever created has been vulnerable to booms and busts. Financial systems also are pulled between the poles of fear and greed and states long ago realized that interventions which blunt risk spur investment by allaying fear to some extent. To state that regulations put in place decades earlier have no role in subsequent financial calamities sounds definitive but how long is too long for a bad decision to be linked to an outcome? One year..five years, 20 years, 100 years? I agree that when there is it becomes very difficult to provide definitive proof but just because something is hard to definitively prove does not me it is not true.

    There is no question that private decisions very proximate to the housing bubble and collapse played an immediate role. However, one cannot completely discount the role of long standing preferential treatment of real estate investments in directing resources to the real estate sectors. While the specifics of tax preferences may differ between countries, virtually all of the countries shown in the McKinsey graph have tax preferences of some sort directed toward home ownership.

    The question should ultimately be not who is to blame but what policies are wise or unwise. If your horizon on making those assessments focuses just on proximate causes, I believe you will garner little insight into how to minimize the occurrence of financial calamities. Understanding of what is both necessary and sufficient is important but a longer time line requires that we also try to understand what may also be necessary but not sufficient.

  18. wj says:

    Barry:
    Thank you so very much for all your work in explaining this crisis.
    Your work will long persevere as some of the most cogent and understandable explanations of this historical world wide disaster.

  19. Jim67545 says:

    Dad29:
    The two income household in my opinion was one little-recognized ingredient. Where I think it played a role was in the huge miss made by those who were supposed to consider risk – from underwriters of the mortgages to rating agencies. Two incomes were viewed as reducing risk by diversifying sources of income. In reality it DOUBLED the risk when the family was then leveraged up and needed both sources of income. The loss of either of the 2 jobs sunk the ship. Then the recession caused exactly that to occur resulting in a size of delinquencies not anticipated.
    There were a number of reasons that those who underwrote and those who bought MBS thought that mortgages of all types were of very very low risk. As it turned out they were very very wrong.

  20. BusSchDean says:

    medcon: a few of points: 1) there have been few posts here that were not focused on identifying wise vs. unwise decisions; 2) knowing one from the other means understanding the impact of various decisions; 3) the relative impact of multiple decisions (some simultaneous and some sequential) can and have been identified in many historical events, though perhaps not to the second decimal; and 4) holding people accountable is part and parcel of having a market-based economy (those making losing decisions should lose), a regulated market place (those who break the rules need to know there are consequences), and meritorious managerial structure (those whose decisions cost the firm need to pay a personal price.

  21. Through the Looking Glass says:

    All answers are taking the focus off the problems we can fix.
    1. End lobbying aka the shadow government rigging the game for insiders.

    2. Term limits for all , no career politicians that perpetuate the dysfunctional system
    There’s another big lie that they have to stay in Washington to get things done.
    quack, quack,yea that smells like a duck too.
    ” The best investment on Wall St is a bought politician” should be on a bronze plaque on the bronze bull there.

    3. Stiff Criminal penalties to both the SEC and Wall streeters who game the system.
    The fact that the SEC was the AAA farm team for Goldman Sachs really tells you how bad it can get for anyone below the top echelons of this financial crisis.

  22. Asymptosis says:

    I’d be very interested to hear responses to this Eugene Fama argument:

    “all assets declined by about the same amount, and real estate around the world by the same amount, even in places where there were no subprime mortgages.”

    http://www.chicagobooth.edu/news/2011-10-28_fama.aspx

    On its face the argument has legs, at least if the first argument in this post does (“it was global, so CRA wasn’t the cause”).

    But it also seems ridiculous on its face: subprime had nothing to do with the meltdown?

  23. slowkarma says:

    @medicalcontrarian: thank you.

    Over-simplifying the problem in the search for villains is not particularly helpful if you’re trying to understand now the world is working now. That’s a political impulse, not an econ impulse. Bloomberg wasn’t absolutely incorrect, he was simply making the same mistake as others are making — over-simplifying. One underlying truth is that bubbles are mostly created by easy credit, and governments are always complicit in creating that. The US government was, as were the governments of Ireland, Great Britain, Iceland, Greece, Spain, etc. The vehicles were different, but the governmental involvement was crucial. Another underlying truth is that bubbles require a mass psychology — mass involvement — to inflate. I would argue that this involvement is much more self-conscious than some want to believe: that the involvement is often deliberate, and not the simply the product of snake-oil being sold to the stupid.

  24. Frilton Miedman says:

    Asymptosis Says:
    November 26th, 2011 at 11:59 am

    ” But it also seems ridiculous on its face: subprime had nothing to do with the meltdown? ”

    On it’s own there might not have been a meltdown if sub-primes were the only problem, but for the fact that they were being pushed for the creation of fraudulently rated “triple A” assets, once the underlying mortgages began to default (at the same time TBTF’s wee corning oil prices that inflated RBOB) – the obvious happened and the banks knew it would.

  25. rktbrkr says:

    Only 13% of new home purchases east of I95 during the bubble years were made by owner occupants and that is what has blown up, not home purchases in the ‘hood.

  26. louis says:

    Nobody wants to fix it, there must be money to be made waiting for those homes to change hands.

    Follow the Money.

    We just need the “burglars” in all this to need lawyers.

    http://www.youtube.com/watch?v=BycKBJiAVjQ&feature=related

  27. [...] In response to criticisms of the piece, he has now written a follow-up on his blog:  Examining the big lie: How the facts of the economic crisis stack up: [...]

  28. InterestedObserver says:

    @Frilton Miedman: “the obvious happened and the banks knew it would.” I really think you underestimate the stupidity of many involved. There’s also the crass “sure, it may eventually blow up, but I’ll be fine” or perhaps “this time it’s different” mentalities. All together they’re a very toxic brew…

  29. Tarkus says:

    @slowkarma said

    “That’s a political impulse, not an econ impulse.”
    ——————————
    The search for villains is actually essential to root out the underlying problem. Policies do not exist in a vacuum. They are deliberately created by people, based on an ideology. The meme “everyone is guilty, so no one is to blame” serves the perpetrators better than anyone else and allows them to avoid consequences. While government is definitely complicit, as the saying goes – “It takes 2 to make a bribe. One to offer it, and one to take it.”

    As far as “the masses” involvement, yes, but that is a non-sequitur. The ratings placed on the derivatives were fraudulent, as the internal e-mails written by raters revealed. Those working for ratings agencies are often disparaged as not being “bright” enough for Wall St, who only take the Best and Brightest. So you can’t have it both ways then – that the raters were smart enough to know it was a “house of cards”, but the Wall Streeters did not. Did Madoff’s victims “know”? Maybe some suspected. But it is the perpetration of fraud – not being defrauded – that is the crime, so it is irrelevant.

  30. Greg0658 says:

    I’ll ditto the hi5 to medicalcontrarian .. with a but .. in any organization faults must be rated to focus attention to/towards … *best wishes with this system .. imo the credit was advanced because we needed it to survive ie the churn of it all .. now the mess for the next generation – ummm goto *

  31. Ridge Runner says:

    In developing a ‘fishbone” cause-and effect diagram for the 2008 financial crisis and its likely return in the days ahead, http://en.wikipedia.org/wiki/Ishikawa_diagram I find all of the following observations helpful:

    Bill Black’s 2010 testimony and recent 2011 philippic at Occupy LA:
    http://fdlaction.firedoglake.com/2010/04/20/transcript-video-bill-black-testimony-on-lehman-bankruptcy/
    http://www.house.gov/apps/list/hearing/financialsvcs_dem/black_4.20.10.pdf
    http://www.youtube.com/watch?v=N_AuvLTJNh0

    Several of the panelists, especially Jim Grant, at this recent AEI symposium on the Fed:
    The Fed: Hero, Villain or Both? http://www.aei.org/events/2011/11/16/the-fed-hero-villain-or-both/

    Emmanuel Derman’s recent book:
    Models.Behaving.Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life http://www.amazon.com/Models-Behaving-Badly-Confusing-Illusion-Reality-Disaster/dp/1439164983

    Simple legislator venality and regulator fear and hope for future big bucks jobs in the firms they were regulating played a bigger part than legislation like CRA, as BH points out, but the excessive deference to various elements of the housing industry (Realtors, builders, mortgage bankers) based on the mythologies of home ownership played a significant role in providing the window dressing for disguising the venality, and prompted both the Clinton and Bush II administrations, together with housing and housing finance industry allies in Congress, to excesses in the name of increasing the fraction of households in owner-occupied quarters. This included flawed research emitting from Fed-sponsored economists arguing that looser underwriting standards would not be unduly risky, and excessive hubris on the part of Wall Street financial engineers regarding the precision and relevance of their asset-backed securities pricing models.

    Once the ball got rolling, as Bill Black points out, all of these temptations to excess were exploited to the hilt by financial buccaneers who bloomed as they had in the early 1980′s when the S&L’s were turned loose by Garn-St Germain to solve their disintermediation problems by rolling the dice with depositor money attracted via the FSLIC guarantee. The Lincoln Federal, LTCF, Enron, Wa Mu, Countrywide, and Lehman fiascoes were all of a piece in this respect: massive hubris, reckless risking of OPM, and somnolent or ‘protective cover’-oriented regulatory regime. Given the continued opaqueness of the markets for derivatives and laxity of enforcement of existing regulatory frameworks, recurrence of the fiascos is only to be expected, although one can hope that MF Global will be the “straw that caves the camel’s back” of resistance to both effectively drafted and effectively enforced regulatory frameworks. Someone like Bill Black as AG, and someone like Jim Grant at Treasury or FED (until the latter is wound down and closed) might have a chance to turn the situation around, with sufficiently robust support of the public (whether TEA- or OWS- driven).

  32. wunsacon says:

    “Don’t let people make loans that cannot be repaid.” That’s what Bill Black said after the S&L crisis. Well, what are the biggest “loans” that cannot be repaid? Derivatives unbacked by reserves. Companies made $n00 trillion in derivative bets with little in the way of reserves.

    What was/is the effect of all that? Consider insurance against interest rate spikes, currency devaluation, or default. The availability of insurance against those events induced people to lend more freely and at lower interest rates than they otherwise would’ve. Derivatives artificially lowered interest rates by making people think there was less risk than there really was. (That’s beyond the ultra-low-rates set by Greenie.)

    Now, people realize the derivative dealers “have no clothes” and can’t repay in the event of actual loss. The government stepped in to prevent cascading defaults and clusterfuck litigation between counterparties.

    One of our goals should be to address the above root cause.

  33. DeDude says:

    Without different types of support for home ownership home prices might have been 10-15% lower (to make it possible to own in spite of higher interest rates and no tax deduction). However, prices would still have increased drastically as rates fell and funny mortgages made monthly payments lower. The ups and downs would have been exactly the same just from a slightly lower level.

  34. Moss says:

    The essence of the debate, regardless of the facts and data, is the total loss of conscience by both the borrower and lender.

  35. Ridge Runner says:

    “especially the delusion that a $100K home became a $400K home just by sitting there for 20 years”

    Not entirely delusive, given persistent inflation, although the magnitude for the last 20 years has been relatively mild compared to earlier decades. Those whose inflation instincts congealed in those earlier decades might be less sensitive to the reduced magnitude of inflation more recently. Still, the bulge in the difference between nominal income growth and house price growth, and between rental rates and monthly mortgage carrying costs should have been warning enough for those paying attention. Lamentably, few paid attention.

    $100,000 inflated:

    1991-2011 (20 year period)
    http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=100%2C000.00&year1=1991&year2=2011
    $166,241.56

    1981-2001 (20 year period)
    http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=100%2C000.00&year1=1981&year2=2001
    $194,829.48

    1971-1991 (20 year period)
    http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=100%2C000.00&year1=1971&year2=1991
    $336,296.30

    1981-2011 (30 year period)
    http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=100%2C000.00&year1=1981&year2=2011
    $249,088.01

    1971-2011 (40 year period)
    http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=100%2C000.00&year1=1971&year2=2011
    $559,064.20

  36. JerseyCynic says:

    Hasn’t greed on wall street existed forever? Why, this time, did it lead to such a meltdown?

    Who was supposed to provided the oversight? HUD and the Office of Federal Housing Enterprise Oversight
    http://en.wikipedia.org/wiki/Office_of_Federal_Housing_Enterprise_Oversight

  37. Joe Friday says:

    VennData,

    Gingrich likes Chile’s solution Social Security

    How apropos.

    The Chilean “solution” is such a devastating disaster, the vast overwhelming majority of Chileans want to return to their old system, which is very similar to our Social Security.

    Leave it to the RightWingers to get it ass backwards.

  38. AtlasRocked says:

    I’m still interested in seeing the not-paying instead of the default rates in the same statistical areas.

    Since foreclosures aren’t happening in a large number of cases, using Prime delinquencies of 30+ and 60+rates seems like it should be checked in this data set in order to confirm the loans made by these agencies you are saying did not contribute are really as non-contributing as the default rate indicates.

    Maybe you’re leaving this out for a good reason, Barry, I’m open to that, but I can’t think of why it would be omitted if you’re trying to be thorough.

    It could actually make your case stronger. It could make it weaker. But it seems like it should be checked to be thorough, right?

    ~~~

    BR: I dont understand the distinction you are making. If a borrower is 90 days delinquent, they are in default — regardless of whether the bank elects to foreclose or not. If you think this is a distinction of significance, well then get the data, analyze then numbers and report back to us.

    But please, spare me your bullshit insinuations: “Maybe you’re leaving this out for a good reason.”

    All that sentence does is inform an educated reader that you are not to be taken seriously.

  39. victor says:

    BR: John Bogle opined along the lines of “we’ll be surprised in the end to see how few scoundrels caused all this”. And Nassim Taleb’s writes “I’m interested more in what a man doesn’t know that in what he knows”. So I put it to you like this: Could it be that as we speak, debate and proclaim that we’ve cracked the puzzle, there is a group of select few who are watching all of us with amusement, saying: they don’t know the half of it?

    To those on this blog bashing poor GOP (actually poorer than the D Party at the moment) and Fox News (MSNBC is OK?) I remind you that voter registration is roughly 1/3 D, 1/3 R AND 1/3 I and that I, as a fierce I feel left out, where do I fit in your lamentations?

  40. Frilton Miedman says:

    InterestedObserver Says:
    November 26th, 2011 at 1:10 pm
    “@Frilton Miedman: “the obvious happened and the banks knew it would.” I really think you underestimate the stupidity of many involved. There’s also the crass “sure, it may eventually blow up, but I’ll be fine” or perhaps “this time it’s different” mentalities. All together they’re a very toxic brew…”

    Kyle Bass’s story led me to my conclusion.

    In 2006 he couldn’t get an answer from anyone as to what CDO’s were comprised of, not even banking executives, he finally bumped into a man who packaged them by accident and as soon a he learned what was in them he opened a short hedge fund, he’s a billionaire now..

    The underlying value of CDO’s were being intentionally obscured while the banks paid ratings co’s to publicly promote them as “triple A”.

    To add a layer, Bernie Sanders recent release of CFTC records from 2008 showing that GS, MS and other banks were intentionally manipulating oil futures provides fuel to the argument that if they intentionally pumped RBOB prices they could initiate the defaults to expedite the crash after shoring short positions.

    Bottom line, TBTF must go, political bribery, revolving doors and citizens united has to be stopped.

  41. victor says:

    At the times Buffett called derivatives “financial weapons of mass destruction” we were fed the fairy tale that all these derivatives that were hovering up around all of us were somehow part of a zero sum game, that each player had a counterpart and that they are nothing else but a sort of innocuous insurance policies and that most would simply expire without causing any damage. Yeah, right! Being the person that I am, the thought of someone like Angello Mozilla getting away with a $110 million LEGAL, LEGAL damned it! golden parachute really makes my blood boil.

    Interestingly, Buffett also “dabbled” into derivatives and as far as I know lost some $12B and called it a “dumb” mistake.

  42. AtlasRocked says:

    In case there is any doubt – I have said before and I say again, Greenspan’s low interest rates were a prime culprit in the meltdown, far and away the #1 cause. Both parties cheered the policy, we don’t need to pretend it was a Republican idea. Neither party wanted Volcker’s high interest rates either, remember?

    Now if easy money was a cause of this meltdown, why are so many on this forum in favor of the fed making it easy for the gov’t to borrow money for fund the 100% failing idea of Keynesian stimulus, which has zero history of paying back the debts it creates?

    If easy money failed us by deluding us into thinking it was a healthy thing for the economy in 2004, why is easy money a good thing for the gov’t in 2011? Isn’t it a serious and grave concern it is deluding us now, too? What are the signs, different than the prior 30 years of deficit spending, that make us conclude with near certainty it is building us a lasting and durable recovery?

  43. fineoldcorker says:

    Terrific. Let’s not pull punches. Flush out the liars. Ritholtz for president!

  44. Iwasframed says:

    OK, we get the Big Lie. Now how about the Big Push for change?

  45. amboycharlie says:

    In Economics 101, the economics faculties used to trot out the “Tragedy of the Commons” problem to show us how inferior socialism was. The thesis was later discredited when scholars were able to show that a regulated commons was able to thrive for quite a long time. But, it never occurs2waszqwaZcx653w to these Elmer Fudds that their much vaunted markets are also a commons, and when they are unregulated, they operate like manic depressives.

    In my novel on this subject, the following conversation transpires:

    “I’m sorry, but I don’t get it. Your clients were paying you exorbitant fees to manage their money for them, and you couldn’t even play the game by its most basic rules?”

    He was just about to say, as she paused, that nobody wins the game anymore playing it by the rules. Then it occurred to him everyone loses when nobody plays by the rules. The Tragedy of the Commons becomes The Calamity of the Market. The bugaboo of communism is the oobagub of capitalism. But, before he was able to speak his mind, she finished her thought with a zinger.

    “What were you trying to do,” she demanded, “sabotage yourself?”

  46. amboycharlie says:

    In Economics 101, the economics faculties used to trot out the “Tragedy of the Commons” problem to show us how inferior socialism was. The thesis was later discredited when scholars were able to show that a regulated commons was able to thrive for quite a long time. But, it never occurs to these Elmer Fudds that their much vaunted markets are also a commons, and when they are unregulated, they operate like manic depressives.

    In my novel on this subject, the following conversation transpires:

    “I’m sorry, but I don’t get it. Your clients were paying you exorbitant fees to manage their money for them, and you couldn’t even play the game by its most basic rules?”

    He was just about to say, as she paused, that nobody wins the game anymore playing it by the rules. Then it occurred to him everyone loses when nobody plays by the rules. The Tragedy of the Commons becomes The Calamity of the Market. The bugaboo of communism is the oobagub of capitalism. But, before he was able to speak his mind, she finished her thought with a zinger.

    “What were you trying to do,” she demanded, “sabotage yourself?”

    http://bonalibro.us

  47. wunsacon says:

    amboycharlie, yes! So true.

    Imagine a few NFL owners/coaches “persuade” referees into not calling penalties against their team(s) — “persuade” them via a revolving door between referee positions and sweet coaching gigs. How would that turn out?

  48. victor says:

    @amboycharlie: please, let’s get some basic definitions straight. Capitalism is an ECONOMIC system that has been under attack by its surrogate, crony capitalism with bad consequences we are experiencing nowadays. Communism is a political, social and economic system that worked so wonderfully in the USSR that it imploded and it is still “working” in Cuba and N. Korea; and has been perverted in China where it has been working so/so but we dont know for how long the masses there will trade their civil rights for economic gains. Actually I like the excerpt from your novel.

    About Socialism: if you mean an economic system with an elaborate social safety net put in place by voters within a Democratic political system a la Scandinavia, I dont have a problem with this although I dont think it would work well here in the US. But the true definition of socialism is that it is but a BRIDGE between Capitalistic bourgeois Democracies and the great (Utopian) Communism, dictatorship of the proletariat and all.

  49. Frilton Miedman says:

    Ask a Communist about Democracy and free markets, he’ll cry “Fascism”.

    Ask a Fascist about fair & regulated free markets, he’ll hammer you with words like “Socialism” and “Communism”. (…or “government takeovers”)

    There are painful extremes in both directions, I think it’s no coincidence that Congress has a lower rating the Communism right now.

  50. leveut says:

    Hail Ritholtzia

    “•The boom and bust was global” referring to housing prices.

    If the socalled “big lie” refers to the financial and economic disaster of the US and world economies, the problem was housing prices, but rather the financing mechanisms, changing from 20% downpayments to 0% down, to the bundling of loans into “packages” for sale and resale, liar loans, no documentation loans, to the ricing dicing and slicing of the packages for resale of the bits and pieces, etc.

    The housing prices per se are only a symptom of the problems. As such, they are kind of irrelevant towards proving anything relating to “causation.” At best, they can suggest where the biggest underlying problems were, and where they weren’t.

    * “For example, if the CRA was to blame”

    Does anyone seriously say that the CRA was the sole cause of the economic and financial collapse?

    This is a straw man.

    “•Nonbank mortgage underwriting exploded from 2001 to 2007, along with the private label securitization market, which eclipsed Fannie and Freddie during the boom”

    That is mostly a true statement, but is a Clintonian Statement? Is it literally true but completely misleading? The graph shows that from 1998 Fannie and Freddie had massive dominance, and even at the “private peak” in 05-06 they still had a combined 60%.

    There is a question that is begged in that discussion, which is to say, an underlying assumption that is assumed, without question, without data, without evidence, to be true. The statement is: Freddie’s and Fannie’s practices, before and after 1998, had absolutely nothing to do with the financing shenanigans of the booms, whether as actual practices or as leading the way to show what was possible and what would be permitted.

    As an observation, Ritholtz seems to go to extreme lengths to absolve Freddie and Fannie from having anything to do with anything relating to the housing price boom or the financial corruption associated with it.

    “•Private lenders not subject to congressional regulations collapsed lending standards. ”

    This is simply a repeat of the previous section.

    “Subprime Lenders were (Primarily) Private”

    Sure. Just out of curiousity, weren’t Freddie and Fannie (primarily) private? Did they lead the way in financing abuses?

    Also out of curiousity, what happened with regulations of mortgage lending, banking, etc. during the Clinton Administration, regulations the Executive Branch had control over?

    Also as an observation, it seems to me that if what Ritholtzia holds to be The Revealed Trvth is in fact so, then the Gretchen Morgenson book is 90% fantasy.

    Sometimes reading here in Ritholtzia I think people believe history started January 20, 2001.

    Ritholtzia! I salute you!

  51. AtlasRocked says:

    Fred Siegel wrote: “They’re on the same side of the street politically,” he says. “They’re both in favor of big government. The Wall Street people I talk to, they get it completely.” What he means is that the Bush and Obama administrations bailed out the large banks, and that economic stimulus and near-zero interest rates kept them flush. “Obama’s crony capitalism has been very good for New York’s crony capitalism,” he says. Over at Zuccotti Park, “there are a few people there who do get it, but very little of their animosity follows from this.”

    One can appreciate why the “we are the 99%” militants might resist Mr. Siegel’s logic. He links the liberalism of the 1960s, not any excess of the free market, to today’s crisis. The Great Society put the state on growth hormones. Less widely appreciated, the era gave birth to a powerful new political force, the public-sector union. For the first time in American history there was an interest dedicated wholly to lobbying for a larger government and the taxes and debt to pay for it.

    A former editor of the left-leaning Dissent magazine, Mr. Siegel has written several well-received books on New York, including the 1997 “The Future Once Happened Here.” He calls his hometown “the model for cross subsidies” in America. “Wall Street makes money off the bonds that have to be floated to pay the public sector workers in New York.”

  52. rktbrkr says:

    I’m still interested in seeing the not-paying instead of the default rates in the same statistical areas.

    Since foreclosures aren’t happening in a large number of cases, using Prime delinquencies of 30+ and 60+rates seems like it should be checked in this data set in order to confirm the loans made by these agencies you are saying did not contribute are really as non-contributing as the default rate indicates.

    a-ha. BR is covering up a conspiracy where the GSEs don’t foreclose on the po folks in Deetroit and Balteemore but they do foreclose on the speculators in the sand states, got it!

  53. DeDude says:

    @Asymptosis;

    Look carefully for the definition of “subprime”. The important uniform aspect of this world-wide housing bubble was “loser lending standards” made possible by the Wall Street magicians who could make risk “disappear”. Other countries may not call their loser lending standards “subprime” and may not even have had liar loans and 125% loan-to-value products. But the bubble was blown by a sudden drop in lending standards that allowed a mob of new purchasers to enter the market (at all levels) and then supply/demand took over and blew up the prices. The sellers could then create a buying panic with their “buy-now-or-be-forever-priced-out” slogans. However, when lending standards suddenly got tighter …Ka-booom.

  54. EMichael says:

    Geez

    Reading some of these comments make my teeth hurt.

    Very simple. BR made it factually clear and very simple. Yet we still read comments that, if true, were such a tiny part as to make no difference, or that somehow these “reasons”( IE, the change from 20% down ot 0% down;CRA, etc.) that mysteriously lay dormant for a decade, suddenly awoke and were major “reasons”.

    C’mon, MSTR.

    “Andrew Haldane, the executive director for financial stability at the Bank of England, is calling a large part of modern finance:

    In fact, high pre-crisis returns to banking had a much more mundane explanation. They reflected simply increased risk-taking across the sector. This was not an outward shift in the portfolio possibility set of finance. Instead, it was a traverse up the high-wire of risk and return. This hire-wire act involved, on the asset side, rapid credit expansion, often through the development of poorly understood financial instruments. On the liability side, this ballooning balance sheet was financed using risky leverage, often at short maturities.

    In what sense is increased risk-taking by banks a value-added service for the economy at large? In short, it is not.”

  55. DeDude says:

    @Slowkarma

    “One underlying truth is that bubbles are mostly created by easy credit, and governments are always complicit in creating that. The US government was, as were the governments of Ireland, Great Britain, Iceland, Greece, Spain, etc. The vehicles were different, but the governmental involvement was crucial.”

    I think you are confusing truth with truthiness in order to ram the square reality into your little round hole of an ideology, that “its-always-di-gobinments-fault”. The only government faults in most of the real estate bubbles around the world were sins of omission (not “creation”). Yes they should very heavy handed have broken up the party of free market forces, and send the banksters into their rooms to do their homework. But in Iceland that might not even have worked since most of the problems there came from abroad – they would have had to close foreign access to their currency.

  56. EMichael says:

    Oops, missed posting the total explanation and the link:

    “Basically, Haldane argues that finance fooled investors into believing that it had found a way to earn higher returns, whereas all it was really doing was piling on hidden risk. And he suggests that much if not all of the rise in the share of finance in GDP reflected this deception; in effect, Wall Street and the City were con artists extracting huge rents from an unwary public (and eventually dumping much of the cost, when things went bad, on taxpayers).”

    http://krugman.blogs.nytimes.com/2011/11/23/a-gigantic-scam/?smid=tw-NytimesKrugman&seid=auto

    That is all it was. And these constant repetition of silly little unimportant factors are more than a little aggravating.

  57. jackalope129 says:

    Fannie and Freddie should share some responsibility – when they began to lose market share they added stated income, low fico and high LTV products to their line up to match the Wall Street competition.

    ~~~

    BR: Yes, with Bear, Lehman, Citi, BofA, AIG, Goldman, Merrill, Countrywide, etc. They were just two more crappy banks.

    That is quite a different story line than the one being pushed by Corker, Bloomberg, Sowell, et. al.

  58. biglot says:

    Back in 2007, or thereabouts, a woman in the real estate business pointed out to the CNBC bobble-heads one day that, *There’s something wrong when people who don’t qualify to rent one of my apartments can just walk across the street and get the cash to buy a house.* Of course, at that time, she was not the only one expressing such sentiments.

  59. AtlasRocked says:

    @Dedude – Good summary in “Look carefully for the definition of “subprime””.

    When some of us attack the arms of the gov’t and policies that made loans easier for various voting groups, it doesn’t mean we disagree with the summary you post here.

    The gov’t needs to be out of the business of promoting business and promoting groups. It needs to be in the business of promoting best business practices.

    It can’t do that as long as it is responsible for wealth transfer payments. Those need to be moved back to the states, so the conflict of interest is removed.

  60. EMichael says:

    geez jackalope,

    Do you have a copy of F&Fs credit matrix for stated income, low fico and high LTV loans during the boom which shows you have a point?

  61. Moss says:

    EMichael:

    ‘found a way to earn higher returns’

    What they found was a way to fabricate a perceived higher return. When the ratings agencies blessed it with the Tripe A seal of approval the buyers saw an all clear event. It was all really junk with deceptive ratings.

  62. InterestedObserver says:

    @EMichael – clearly the risk was quite enhanced, but that seems in some respects a post mortem of the results. We fell off a cliff, of course the risk was too high….

    It’s less singular “causes” than strongly interacting and dependent factors. Sure, maybe a semantic point. Globally, there were lots of larger and small factors that historically served as checks and balances, which were removed. There was a long period of very low interest rates, that provided both the direct fuel and driver (low yield) to get creative to provide more and more fuel and use leverage to push yield. People who really shouldn’t have been given access to that credit were via ratings agencies providing AAA ratings to mortgage securities. That drove housing prices, but the price bump didn’t matter as more creative financing schemes hit the streets and risk was obscured by the ratings on the CDO’s. That bubble in home prices provided a path for everyone else to borrow against the inflated asset and made end game scenarios with those creative financing schemes seem irrelevant (hey, we’ll move on and still make money on the way out, or take out a home equity loan and stay…). And there were a whole host of other factors, and yes, let’s throw in just about everything discussed above including the CRA and so on. They’re factors. Some factors seem very direct (low interest rates, fraudulent ratings, fraudulent loans), other factors removed controls which tended mitigate problems that could occur.

    Chapter 19 of Bailout Nation seemed to have it about right. Plenty of interacting factors. Some key, some contributing, others relatively minor. It’s the elevation of the minor/negligible factors to key in some of the political discussion that’s not only disheartening, but dishonest.

    With regard to banks having this all known from the start, them being caught short at the end seems to belie that notion. Sure, some figured it out earlier, but I still go back to being stupid, and by stupid, I mean either not or being unable to map out the potential secondary and tertiary consequences down the line. Stupid is exclusively focusing on the one step A then B scenarios and not seeing the house of cards collapsing. Yea, it’s a complicated situation, but these guys are paid to understand complicated.

  63. EMichael says:

    “that made loans easier for various voting groups”

    They just won’t quit. The numbers of loans do not matter. The orginators of the loans do not matter. The performance of the loans do not matter.

    Moss Says:

    November 27th, 2011 at 9:27 am
    EMichael:

    ‘found a way to earn higher returns’

    What they found was a way to fabricate a perceived higher return. When the ratings agencies blessed it with the Tripe A seal of approval the buyers saw an all clear event. It was all really junk with deceptive ratings.”

    Umm, if you actually read the post it would be apparent that is exactly what it said.

  64. EMichael says:

    @InterestedObserver,

    Oh no, they knew it. They all knew it.

    To not believe that is a fact means that you have to believe there is a banker in the world who thinks a loan requiring full documentation in terms of income and expenses has the same credit risk as a loan that does not require any documentation. Or that a loan that has a teaser rate like a 2/28 has the same credit risk as a 30 year fixed.

    There is no such banker. There never has been.

    Geez, they weren’t priced the same to the consumer because they were riskier, but somehow they were sold to investors at carrying the same risk.

    Just an big scam by the investment banks. And the ideology driven, intellectually deficient “usual cast of characters” want people to think there were a “bunch of other factors”.

    Yep, there were a lot of players involved. But the rules were all set by the investment banks.

  65. Greg0658 says:

    AtlasRocked @ 9:55p “why is easy money a good thing”
    wondering do you have nothing to loose andOR a big bet on the big short ..
    Are we still going to payoff on CDS? I hope not. Betting on failure is not a bet at all.

  66. Jim67545 says:

    This shoodaknown discussion about risk is interesting. Everybody understood that Alt-A, NINA, and various sub-prime loans carried higher risk. Anyone involved in lending would know that, absolutely. In fact ANY lending involves risk.

    The issue is not whether there was risk (there always is risk) but how much added risk. To my knowledge nobody “stress tested” these or looked at a mature portfolio of these (new) loan products to see how they would perform over time. So, they relied on past history. F & F issued information on Alt-A and the rest concluding that the slightly higher rates/fees they were charging would offset slightly heightened losses. Wrong.

    Basing future performance on the prior 10-15 years was dangerous at that point in time. I can recall months during the late 90′s when my (small) bank had not a single delinquent home mortgage. That was a portfolio of good to fair credits originated to be held in portfolio. I don’t think F&F understood the moral decay that originating for sale (of the loan and risk) would spawn. And, it took awhile to pick up speed and rate of decay as competitive factors and greed went nuclear.

    There were also societal changes that occurred. Generally people changed their priority in payment from mortgage, car, credit cards to car, credit cards, mortgage. There are a number of contributory factors to this but perhaps another day.

  67. InterestedObserver says:

    @ EMichael – let me qualify my thoughts a bit.

    I’d agree that they knew it in a “this time is different” sort of way. You know the type, if A then B doesn’t apply anymore, so I see we’re in A, but B’s not happening this time, since something magical is afoot. That type of didn’t know, the delusional style of didn’t know. Maybe too semantic on my part.

    I look at the dot.com implosion of a decade ago, things like Groupon at the moment and marveled at the time and marvel now that a bit of greed and a dose of wishful thinking is a half step away from willful delusion which is a cousin to stupidity in my book.

    I still believe it’s pure stupidity, but would grant that the choosing between our two views is by no means clear.

  68. EMichael says:

    @InterestedObserver,

    I guess the “it is different this time” could be a possibility. I do not think so. I think the “greed” part totally blotted out any “wishful thinking” part.

  69. McMike says:

    Wow, a lot of oxygen consumed trying to pin down the exact butterfly in Beijing who’s flapping wings created air currents that combined exactely with other inputs as to form a hurricane that strikes the US months later.

    And it could be just that a handful of terrorists, organized by a person that used to fight for the USA decades ago, but now hates America for whatever reason, simultaneously hijacked several airliners and flew them into buildings, right as the USA was exiting a recession, as the tech bubble was starting to leak after fears of Y2K perhaps setting off a global inflationary spending spree in the public sectors exascerbated by a campaign of ‘consumption as a patriotic duty’ (keep America rolling) and the lowering of interest rates as consumption became the be-all, end-all goal.

    In our increasingly complex political economy, for every action there is not only a reaction, but also an unkown number of endogenous unintended consequences altered also by exogenous forces. And then repeat…

  70. [...] just as the big cheese burger induced bulge around the middle can be self-lied away, so can the collapse of the perfect rational market with a big lie. A lie so audacious that if lies could be natural wonders of the world this one would easily make [...]

  71. victor says:

    And now, forward thru the fog, FinCrisis1.0 behind us, FinCrisis2.0 rising? With the major protagonists of FinCrisis1.0 now practically insolvent due to their risk taking folly in the subprime mortgage realm of the Never Never Land, who will be to blame as FinCrisis2.0 is acomming upon us?

    My understanding is that this time it wont be subprime mortgages backed by CDO’s and other mind boggling derivatives but it’ll be sovereign debt in the form of bonds in need of haircuts. And, I assume these bonds, sitting in the balance sheets of so many financial institutions (at face value, no assumed hair cuts) must be “insured” by a myriad of crisscrossing CDO’s and other financial weapons of mass destruction. Then, sure as night follows day, the curtain falls and the beaten up tax payer is AGAIN left holding the bag while he cannot even hold on to his own (used) trousers? Excuse the oversimplification, but what am I missing?

  72. victor says:

    Oh, I forgot to add to the mix two little items that dont get much press these days: Student Loans and Consumer Credit each standing at a mere $1T and growing. Just wanted to make the picture complete. So, who will come to the rescue NOW?

  73. Frilton Miedman says:

    InterestedObserver Says:
    November 27th, 2011 at 9:36 am
    “….Chapter 19 of Bailout Nation seemed to have it about right. Plenty of interacting factors. Some key, some contributing, others relatively minor. It’s the elevation of the minor/negligible factors to key in some of the political discussion that’s not only disheartening, but dishonest…”

    I cannot agree enough, after countless exchanges with individuals whom refuse to see past the idea that the whole crisis was caused by dishonest low income home-buyers, it seems that a portion of the populace has somehow been programmed to ignore fraudulent ratings, investor fraud or at least professional accountability, I thank Fox network and CNBC for this.

    It’s like a car dealership knowingly selling mass quantities of cars with defective engines, fully aware the engines were going to die, then hearing a group of individuals rant over how it’s the buyers fault for not knowing.

  74. Ridge Runner says:

    Response to :

    jackalope129 Says:
    November 27th, 2011 at 9:00 am

    Fannie and Freddie should share some responsibility – when they began to lose market share they added stated income, low fico and high LTV products to their line up to match the Wall Street competition.

    EMichael Says:
    November 27th, 2011 at 9:15 am

    geez jackalope,

    Do you have a copy of F&Fs credit matrix for stated income, low fico and high LTV loans during the boom which shows you have a point?

    Housing Policy, Subprime Markets and Fannie Mae and Freddie Mac:
    What We Know, What We Think We Know and What We Don’t Know
    Jason Thomas, Department of Finance George Washington University
    Robert Van Order, Oliver Carr Chair in Finance and Real Estate, George Washington University
    November 2010
    http://research.stlouisfed.org/conferences/gse/Van_Order.pdf
    Abstract
    We explore the role of housing policy in the collapse of Fannie Mae and Freddie Mac, the role of Fannie and Freddie in subprime markets and the sources of their default losses. We do not find evidence that their crash was due much to government housing policy or that they had an essential role in the development of the subprime mortgage-backed securities market, which occurred outside of the normal mortgage origination channels and which was funded by non agency or “private label” securities (PLS). They did build a large portfolio of AAA-rated PLS, probably in response to affordable housing goals, but such investments were unlikely to have had much of an impact on subprime mortgage origination volume because the AAA pieces of PLS deals were not the important part of the deals. Rather than brewing for a long time, their downfall was quick and had to do with purchases of risky-but-not-subprime mortgages and insufficient capital to cover the decline in property values.

    My comment: Though this paper has lots of good detail about the GSE portfolios, I question the author’s contention that “such investments [the GSE plunge into AAA-rated PLS] were unlikely to have had much of an impact on subprime mortgage origination volume because the AAA pieces of PLS deals were not the important part of the deals.” On the contrary, I distinctly recall the period in 2008 where hundreds of “AAA rated” PLS deals were downgraded almost overnight to CCC, and holders of those “low risk” tranches, which were generally a good deal more than 50% of the underlying collateral value, got clobbered. The GSE’s were major purchasers of such deals. Still, until I can track down the reports of the rating shifts (and the $ impacts of the rating changes) in my archives, it’s just my memory – not the best witness given all the fog introduced into these discussions by various axe grinders. Still, the above paper and its references are a good place to start.

    ~~~

    BR: You want to cite a paper, but ignore its conclusions because it disagrees with you?

    #Fail

  75. wunsacon says:

    >> Capitalism is an ECONOMIC system that has been under attack by its surrogate, crony capitalism with bad consequences we are experiencing nowadays.

    I heard they were separated in a laboratory, once. Has anyone seen a paper published on this or is it just a rumor?

  76. wunsacon says:

    >> Communism is a political, social and economic system that worked so wonderfully in the USSR that it imploded and it is still “working” in Cuba and N. Korea;

    Don’t draw too strong a conclusion on that data.

    USSR was unmanageable. Just extrapolate from the rancor you see in the USSA over “English First”, “immigrants taking our jobs”, and “Muslims” by a factor of 10. USSR = hundreds of languages, dozens of religions, dozens of ethnic groups. Regardless of economic system, it was too big to hold itself together.

    As for Cuba, show me a Latin American country doing as well (based on statistics for health, literacy, education) despite being blockaded from trading with its nearest neighbor and that (like Israel) has to worry constantly about terrorist attacks or attempts to install another Batista.

  77. Rick Caird says:

    This is at least the 4th time Barry has written about CRA, Fannie, and Freddie. In the last three posts, he has added the Global chart. But, that chart does not show what he purports it to show. If anything, that chart shows conditions in various countries were substantially different. We have Germany, Sweden, Japan and Switzerland with little appreciation. We have the US in the middle with 210%. And, Belgium, Spain, and the UK with around 400%. That argues against some kind of similar cause and in favor of unique causes in each country. Therefore, CRA, Freddie, and Fannie are still in play because they are unique to the US.

    No one I know thinks the 1977 CRA was a factor. The 1977 CRA was small and the individual banks kept those loans on their own books. From 1989 through 1999, the CRA legislation was changed almost annually. This, as Bernanke pointed out, gave the community groups, such as ACORN, a lot more input into the process and increased the number of CRA loans the banks gave out. But, the banks did not keep these loans on their books. They got rid of them via Freddie and Fannie or MBS. By doing this, Fannie and Freddie did increase their profits. This increase was noticed by the commercial banks and they piled in. Meanwhile, Greenspan kept interest rates low and investors demanded fixed rate investments with higher yields. It was a marriage made in heaven. The MBS packagers could take any old sub prime loan, no matter who the originator and turn it around with very little risk to themselves. And, as long as property values were increasing, the property owner could get out whole, just by selling his property. That worked until it didn’t.

    That is why the chart showing the decline of market share by Freddie and Fannie is not very helpful. Since it is given as a percentage, we have no way of knowing if the total amount of MBS issued by Freddie and Fannie actually declined. I suspect it did not. The investor demand for MBS’s could not be satiated until it fell apart in 2007. Basically, it was free money for the securitizer.

    The fundamental question is whether there would have been a sub prime market at all, if we had left the 1977 CRA intact and if there would have been a sub prime MBS market if Fannie and Freddie had not given their stamp of approval to that market. Would the mortgage brokers have been writing those mortgages if there were no buyers and would the buyers have bought those mortgages if there was no sub prime MBS market.

    In the end, it is hard to see who would have gotten the sub prime market going in the first place without CRA, Fannie, and Freddie. That is why I disagree with Barry’s analysis. We all agree that Drexel was responsible for the junk bond market. It is no different in the case of the sub prime market.

    ~~~

    BR: A tortured argument, poorly expounded upon, filled with assumptions and unsupported claims, devoid of persuasiveness, told in a confusing rambling style.

    Aside from that, a few clarifications:

    1. I’ve written about this dozens and dozens of times.

    2. I first showed the Global Housing Boom chart in July 2010; I also cited Yardeni’s work showing this was a Global Synchronized Boom back in 2004. (This is not a new theme for me)

    3. Your a priori Your claim MBS and mortgage securitization only occurred via GSEs is contradicted by the simple reason we have securitized auto loans, credit card receivables, and other such item, with no equivalent GSE.

    If you were my student, the only reason I would not fail you would be to have you tested to see if you had impaired capacity. In short, your comment is a sad indictment of our education system . . .

  78. Greg0658 says:

    a few tail-end comments got where I wanted to go:
    the Feuding Novas (star systems)
    all the ‘isms vs. all the ‘isms
    USSR Cuba NKorea vs. USA GB Euros
    F & F vs. private lenders

    when you have the muscle to starve someone you have the muscle .. polar differences in how to interact in ones lifetime and to Not Starve

    :-) “I heard they were separated in a laboratory, once” .. and then the battles began

  79. Frilton Miedman says:

    Rick Caird = stretching/distorting data, diverting topic, discarding the obvious to create a new reality.

  80. Rick Caird says:

    1. I have only been following your blog for a few months. So, it is not surprising I only remember about 4 times you posted on this. I only added you to my Google Reader after I read “Bailout Nation”.

    2. The chart you are showing is missing the note in the original that says

    “The United States is a minor player among current housing bubbles.”

    The reference to Yardis points to this statement

    “I am particularly encouraged by the mounting signs pointing to the emergence of a powerful global synchronized boom, which should be very good for profits. Materials, energy, and industrials are the sectors that should benefit most from a global economic boom.”

    I don’t understand how that relates to the global housing bubble particularly since it manifested itself so differently in different countries.

    3. I assume you are talking about CDO’s when you talk about securitized credit card loans and auto loans. If so, it is interesting that was started by Drexel. However, compared to MBS those securities never amounted to a very large slice compared to the MBS’s. The number I saw was a maximum of about $180 billion dropping back to $20 billion. They also seemed to mirror the rise in the MBS activity, so they would likely be influenced by the MBS strategies.

    The rest of your response, wrapping your 3 points, is just gratuitous insults. Are you trying to live up to your admonition of “…kindly forgo all civility in your discourse”?

  81. Rick Caird says:

    Two other little things, Barry.

    I forgot to go back a correct the spelling of Yardeni.

    Secondly, it looks like the UK is going to start another bubble:

    http://www.ft.com/intl/cms/s/32e10c0c-1694-11e1-be1d-00144feabdc0,Authorised=false.html#axzz1exhq4NrY

  82. victor says:

    @wunsacon: about USSR,”unmanageable”? they tried to manage it with successive Gulags, then Perestroika, no go, sorry, you fail, I wont say more. About Cuba: jeez, how wonderful a social system! if you have US dollars AND Party connections, now, only recently though, you can get a cell phone and Internet access (strictly monitored of course); Socialismo o muerte. Cuba trades freely with the world; her largest supplier of food/agricultural products? Guess? USA! (cash only, no credit). I’ll take post Allende Chile, Brazil, Argentina, etc over Cuba Libre (sic) anytime. Those of us who lived BEHIND the Iron Curtain, we use to say: the day West Berliners risk their lives trying to jump the Wall into East Berlin, that day we’ll believe Communism is better than Democracies with a capitalist economic system. And we envied the East Germans because unlike most of us they had a border with the free (yes, free) world. Hey, you conveniently left out that beacon of light and freedom and happiness N Korea?

  83. Ridge Runner says:

    ~~~

    BR: You want to cite a paper, but ignore its conclusions because it disagrees with you?

    #Fail

    No, I want to check it’s conclusions against later information. If I wanted to ignore it, I wouldn’t have cited it. The later reference you filtered out provided some good clues to do the checking (who knows – - perhaps the leads in those footnotes will confirm VanOrder’s point? – so why did you filter it out?). Shall we try again:

    WALL STREET AND THE FINANCIAL CRISIS: Anatomy of a Financial Collapse
    MAJORITY AND MINORITY STAFF REPORT
    PERMANENT SUBCOMMITTEE ON INVESTIGATIONS UNITED STATES SENATE
    April 13, 2011
    http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf
    starting on page 41 – the section on the GSE’s

    Incidentally, I was being conservative when I referred to: ‘ “low risk” tranches, which were generally a good deal more than 50% of the underlying collateral value’ – note the 80% share for the AAA tranche in the representative example cited in figure 7 on p 28 of: http://www.globalsecuritisation.com/08_GBP/GBP_GSSF08_022_031_DB_US_SubPrm.pdf

    In support of your point about the major contribution of the reckless issuers of PLS to the amplification of the severity of the housing finance collapse are many sections of that Senate Committee report. The GSE’s were enablers to the extent that they initiated the downward spiral of UW standards, and later snapped up much of the soggy fraud-laden product issued by Countrywide, Wa Mu, GS, and Deutche Banks, et al but the ‘primary perpetrators’ of the complete collapse of underwriting standards were these private issuers. Still open (in my mind, anyway) is the extent of GSE enablement. It was enough to sink them in the end, but would the mortgage bankers and WS investment banks have been able to move significantly less excrement through the pipelines without the volume of sales of their securitized paper (not whole loans) to the GSE’s to keep replenishing their funds for additional buying from originators?

  84. [...] little doubt that mortgage defaults by some bank customers started the ball rolling, though most were private lenders not govt backed [...]

  85. victor says:

    @Rick Caird: “We have Germany, Sweden, Japan and Switzerland with little appreciation”. OK, there are special cases like these: Germany (drag due to East Germany absorption + favorable DM/Euro + tight lending standards; Japan (continued economic malaise + awful demographics, elementary schools are closing down each year, no kids) and Schweiz (the gnomes do things differently tin the Confœderatio Helvetica).

  86. ot says:

    BR you make very convincing arguments, but you shouldn’t confuse them with truth. There are so many dependent factors at play in a subject this complicated that the truth will be impossible to come to, that a great many will have differing opinions on the conclusions and even on the application of data. For example, while the effects of the bubble were global, that doesn’t prove that important changes in credit availablility that started in the US weren’t in great part causal. Afterall, the US is a very big part of the world’s banking and credit systems. I agree that your opposition’s narrative is somewheat “squishy” molding data and arguments to draw conclusions they deem “favorable”, but so is yours. Just because you can point out what’s wrong with their arguments, doesnt make your arguments the truth. My OPINION is that banks and govts(especially those in the US) share a big part of the blame for the world credit bubble, and the public’s base nature was also involved. We can do very little to change the very nature of man (greed, susceptibility to popular delusion etc…). With Barney Frank’s stepping aside today, I’ve been watching some of the clips of his and Schumer’s comments re regulating housing and the GSE’s and it d0es not support the idea that the CRA was an old dead thing, nor does it support the idea that the Repbulicans were against greater regulation and Dems for it. Banks are not filled with martians or venetians, they are filled with and run by humans, susceptible to the same delusional and greedy instincts as the public. I think rather that wasting so much energy on who is to blame, because its closer to everybody than it is to just this group or that(afterall we do have elections to elect the bums), we should spend that energy on what were the delusions and what are they now. Chief among the ones that caused this were reliance on ratings agencies, regulators, and computer models, as well as the risk reducing role of securitization. What are they likely to be going forward?

  87. [...] Examining the big lie: How the facts of the economic crisis stack up For example, if the CRA was to blame, the housing boom would have been in CRA regions; it would have made places such as Harlem and South Philly and Compton and inner Washington the primary locales of the run up and collapse. Further, the default rates in these areas should have been worse than other regions…What occurred was the exact opposite: The suburbs boomed and busted and went into foreclosure in much greater numbers than inner cities. The tiny suburbs and exurbs of South Florida and California and Las Vegas and Arizona were the big boomtowns, not the low-income regions. The redlined areas the CRA address missed much of the boom; places that busted had nothing to do with the CRA. [...]

  88. CitizenWhy says:

    Brazil limits capital inflows into that country because it know that excess capital leads to stupid investment and spending and produces a bubble and a crash. That ;s what hapopened in Ireland, where EU banks poured in huge amounts of capital far beyond what the size of the Irish economy and the number of Irish consumers could justify.

    When a bubble is forming the “money” being spent is really debt, either a loan or a wacked out derivative.

    Using deceptive derivatives Wall Street poured excess capital into the economy of the entire world, but that capital was really debt. Hence the bubble and collapse.

    So how do we prevent the flow of excess capital? And please, austerity is not the answer. Austerity takes essential capital and spending out of the economy, not excess capital. And stimulus i is not excess capital.

    Excess capital (which is really huge debt) is created by banks and those irresponsible things we call non-bank banks (like mortgage companies). So how do we control banks and non-banks and their ability to multiply debt beyond all reasonableness? We can’t because their lobbyists write our legislation and they buy candidates with huge campaign contributions. The US really is a nation where you need huge bribes (campaign contributions) to get anything out of DC. We used to scoff at countries where bribes were part of the business culture. We have met the bribers, and they are us.

    But, as Wm Buckley would say, “None dare call it bribery.”

  89. [...] we know: The usual liars and assclowns have latched onto the SEC litigation against the F&F execs for their the own biased reasons, as [...]

  90. [...] has come up repeatedly over the years — especially with regard to the financial crisis and the Big Lie. Its not that these folks are evil, they merely carry the vestiges of evolution — a flawed [...]